3 myths about reverse auctions in the public sector

Anyone who has experienced the adrenaline rush of participating in an auction — whether in person or vicariously through popular shows like Storage Wars — knows that the rapid-fire competition and the promise of getting a good deal are hard to resist.

Reverse auctions provide that same thrill in public procurement with a twist — instead of participants increasing their bids over time to win a good/service, they try to outbid each other by decreasing their price incrementally to win the business of the procuring organization.

Reverse auctions can be a highly effective tool for public sector procurement teams to achieve best market value and save time on lengthy negotiations. However, they are not widely used thanks in part to some pervasive myths.

Here, we take a look at the truth behind three common misconceptions:

Myth: Reverse auctions are a form of bid shopping.

There’s no question that bid-shopping is an unacceptable practice in the world of public procurement. However, the two are not the same.

Bid-shopping occurs when the buyer seeks out a lower price from a vendor by privately revealing another vendor’s price (without that vendor’s knowledge or consent). In contrast, reverse auctions give all vendors access to the same information at the same time. For that reason, reverse auctions are a fair and transparent practice (The Procurement Office).

The benefits of this transparency extend to vendors, too. Vendors report that reverse auctions provide an even playing field and take the guesswork out of pricing that often occurs in a traditional bidding process.

Myth: Reverse auctions favour larger vendors.

There’s a lingering concern that reverse auctions shut out smaller players. In fact, the research disproves this: in a survey of reverse auction activity at four agencies, the United States Government Accountability Office found that 86% of auctions awarded (valued at more than $22 million) went to small business (Government Accountability Office).

Reverse auctions make it easier for small businesses to compete due to the low barrier to entry and greatly reduced time investment. And when you consider that eBay has been around since 1995, concerns about vendors’ technical ability to participate in an online auction process are receding.

Clear and proactive communication with all vendors, large and small, is a necessary prerequisite to a successful auction. Teams can take the following steps to assuage fears about vendor participation:

Clearly communicate how the process will work, from posting to award, and the logistics of participation;

Consider holding a practice event to ensure vendors are comfortable with the software;

Answer questions to minimize the unknowns; and

Be available during the auction by direct phone and email, in order to address any questions as they come up (NASPO).

Myth: Reverse auctions are an unsustainable practice for cost-cutting.

Another pervasive misperception is that reverse auctions yield unsustainably low prices, resulting in a short-term gain that backfires in the long run. However, both private and public sector reverse auction activity shows significant time and cost savings over successive years.

Massive cost savings, such as this school board’s 64% savings on their hamburger patties contract, are certainly possible with reverse auctions in their first use, as you can expect a large margin to be cut off the purchase price. In subsequent uses, you cannot expect the same magnitude of decreases, or your vendors would soon be out of business. Nevertheless, if used judiciously, competitive bidding through reverse auctions ensures that buyers get the best possible price at that moment through real-time market pricing (Reverse Auction Research Centre).

Reverse auctions are a proven tactic for procurement in the long-term — not as a golden ticket, but as a complement to your overarching procurement strategy.